January 09, 2008

What's the LIBOR?

One of the reasons the Federal Reserve has been lowering interest rates is to help homeowners who have adjustable rate mortgages. Lower interest rates can mean those borrowers will still have affordable payments, but some adjustable rate holders aren't seeing their rates fall because they are tied to LIBOR. What is LIBOR? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, LIBOR stands for London Inter Bank Offered Rate. Translated, this is the interest rate that banks that are located in London - which is one of the major financial capitals of the world - charge each other for loans.

"Now you might say, 'Well, so what?' Well, the 'so what' is that many U.S. adjustable rate mortgages have their interest rates tied to the LIBOR. And the LIBOR is not controlled by the Federal Reserve here in the U.S.

"So, the bottom line here is that you are absolutely right, the Federal Reserve has been pushing rates down. They've been, in part, doing that to try to help borrowers with adjustable rate mortgages. But if you have an adjustable rate mortgage tied to the LIBOR, you may not have seen your interest rate go down.

"And so this presents an issue obviously for policy makers who are trying to contain the housing credit crunch because we have a key interest rate here that's really outside of U.S. public control."